Tuesday, June 18, 2013

Cyprus Update: Capital Controls Aren’t Stopping Capital Flight

It’s been 3 months since the Cypriot crisis was “solved” with capital controls.

Those controls were intended to keep capital (movable, fungible wealth) from leaving the country. A country needs capital for investment and economic growth, but who would want to keep capital in a place where the government can tax it away to cover the mistakes of others? So, when you’re like Cyprus, capital leaves the country. Capital controls are supposed to limit that.

Now … we don’t have a counterfactual: we know what the data says happened with the controls in place, but we don’t know how much worse (or possibly better) things would have been without them.

Anyway, the data isn’t pretty. Twice as much capital left Cyprus in April (after the controls were put in place) than in March (when the country basically was shut down).

Cyprus’ overall problem is roughly in the (low to mid) tens of billions of dollars.

And with capital controls they still lost $3B in a month.

Which money left? About half was foreign, and about half was Cypriot. It’s not good when your own natives are taking their wealth out of their own country.

And surprisingly, a lot of the money that left was already denominated in dollars. That is money that is held in a Cypriot branch of an institution that operates in the U.S. That money should have been safe already, since it kinda’ sorta’ is already non-Cypriot. But it moved too, probably to American financial institutions without operations in Cyprus at all. This is what you do if 1) your long-run goal is to “get the heck out of Dodge”, or 2) you are selling your wealth to family and friends in foreign countries in exchange for basic products that they are shipping to you (in short, you can’t get stuff like, say, printer toner because you don’t have any cash to buy merchandise, and the stores don’t have any money to buy inventory).